Yonah Freemark’s The Transport Politic is easily one of the best and most detailed blogs on transportation policy I’ve come across, and it is also an insightful guide to public policy. Freemark is far more of an interventionist than I am, but, like Brad Plumer of The New Republic, he is very empirically minded. Last week he wrote a terrific post on whether the federal government should cover operations costs for mass transit systems. Until 1998, the federal government did subsidize operations. But since then, the federal government has banned the use of federal funds for operations while paying the lion’s share of costs for new capacity.

On a certain level, this makes sense: we could see this as a matter of giving a man a fish or teaching him to fish, etc. And I had been inclined to think that this arrangement made sense. Now, however, I’ve been convinced by Freemark that we should give some thought to reversing roles, i.e., have the federal government play a role in subsidizing operations while state and local governments take on a larger role in funding capital expenditures.

Drawing on the work of political scientist Paul E. Peterson, Freemark observes that local governments are not well-suited to redistributing income and wealth. At the local level, individuals and households — particularly affluent individuals and households — are highly mobile. Local policies designed to aid the poor might have the perverse effect of undermining the tax base by driving out affluent taxpayers. And so cities are best served by pursuing policies that expand the tax base, which can include developmental projects that enhance mobility. Because international net migration is not as big an issue, the federal government is far better placed to handle redistribution. This, incidentally, is one reason why state-level “millionaire’s taxes” are not a great idea, as Josh Barro explained in a RealClearMarkets column back in May.

Because barriers to mobility are so much lower between states than countries, states are less able to impose greater tax progressivity (i.e., higher rates on high income people) without driving taxpayers and/or capital to lower tax jurisdictions. Federal tax changes to come in 2011, which will reduce high-income taxpayers’ ability to deduct the cost of paying state income taxes, will heighten the competitive advantage of low-tax states over high-tax ones.
This story should particularly hit home for New Jersey residents. The 2009 tax surcharge was an increase to the state’s already-existing Millionaire’s Tax, enacted in 2004. A recent Boston College study found that, while New Jersey experienced a net wealth inflow of $98 billion from 1999 to 2003, this changed to an outflow of $70 billion from 2004 to 2008, as wealthy people chose to settle elsewhere. Extending an even-higher Millionaire’s Tax could be expected to exacerbate the wealth flight.

Given the perils facing local governments that focus on redistribution rather than developmental projects, Freemark thinks through the implications for transit operations — are they best understood as redistributive or developmental?

If a bus or rail system serves almost entirely as mobility of last resort, used only by people in the lower class to get around, it is almost assuredly redistributive. Cities that provide such services are, according to Peterson, investing in something that will ultimately lower the local tax base (I’m not sure if I would go that far, but the argument still makes some since). In these situations, it would make complete sense for the federal government to pay for operations, because it is unfair to burden already poor cities with the need to raise local funds to cover social services.

On the other hand:

If the transit system is used by a whole spectrum of the population and increases overall efficiency of the local economy, it isn’t really redistribution. In these cases, it seems highly advantageous for cities to invest local money in their day-to-day transit, even if it means taking out loans to do so.

That, of course, is the argument that the most enthusiastic transit advocates would be inclined to make. Freemark then raises a theoretical possibility:

Is a potential answer to ask Washington to pay for operations as cities and their metropolitan regions invest in new rail and bus capacity as a developmental tool? Perhaps: If cities investing in new public transportation projects can prove that that spending will increase their tax base over time, there may be advantages to taking out loans to pay for new projects and then paying them back using the corresponding increase in local tax revenues.

There are caveats, as Freemark goes on to explain. But at first glance the idea of federal loans in well-designed projects designed to increase local economic growth has some appeal.